Glossary
Compound interest
Definition
Compound interest is earning a return on both the original amount and previously earned returns. Over long periods it drives most investment growth, and it works against borrowers too.
How compound interest works
The rule of 72 estimates doubling time: 72 divided by the rate.
Fees and taxes reduce the compounding rate, which is why small differences matter.
Why it matters to a firm
Clients who understand compounding save earlier and stay invested.
Questions about compound interest
Why does time matter so much?
Returns earn returns.
Do fees compound?
Their cost does, by reducing growth every year.
Does debt compound?
Yes.
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Related terms: Future value · Rule of 72
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